A tiny reflection on wise adjustments to perform when economy is down. This is true as much for individuals as for organizations.

1. Cut costs by increasing efficiency i.e. do the same (or more) with less. Compromising quality is the last thing to do (it's becoming more competitive).
2. Expand to new markets, offering the same products/services (this is market expansion, not diversification).
3. Stay clear from stocks - all stocks, even "sound" ones ? until signs of recovery. Invest in safe instruments with various maturities, for example 3 to 18 months, in order to have some liquidity when stock market bounces back.

I had to mention something about this financial crisis that affects USA (and most of the world indirectly) and you (yes, you too, somehow!).

When things get complicated, it's easy to overlook the basics. This is the problem at the root of the financial crisis. Really, it's nothing complicated. Hidden beneath obscure layers of derivatives of derivatives of mutual funds, the basics were rotten.

Others, who are more knowledgeable than I, have written eloquently about this topic. I invite you to read two posts by Oren Harari, Leveraged rubbish and Don't wait until it hits the fan.

Xinyuan Real Estate [NYSE:XIN] has issued its IPO last Wednesday and trades well despite low IPO atmosphere. The company develops residential projects for mid-income people in tier 2 cities in China.

Residential construction projects abound. But not all will be successful

I think that this stock might be a good medium-term investment (read: 1-2 years). The real estate sector rode the wave with other sectors in China. However, the real estate market is fragmented into different types of urban areas, traditionally referred as tier 1 or tier 2 cities. Properties in tier 1 cities such as Shanghai and Beijing are already very expensive, to the point that the Chinese government set measures in place to curb housing price inflation. Consequently, I think that there is not much room left for growth in tier 1 cities. However, rising income as well as continuing migration of population from rural to urban areas might still offer high potential for residential real estate in tier 2 cities. So when analysts say that Chinese real estate is "bubbling", it doesn't mean much. We have to look at the different tiers separately.

Another strength of Xinyuan Real Estate is that it diversifies in 5 different cities. Indeed local regulations can easily overheat or hammer down a local market. Regulations are a significant risk for real estate investors in China. If tier 2 cities follow the pattern of their tier 1 predecessors, investors should have a few good years ahead of them before the government interferes with housing prices.

Additionally, Xinyuan Real Estate has several big projects in the pipeline, which should provide them with steady revenues at least until the end of 2008. I also noticed that the company operates since 1997. It is very important to invest in real estate companies that have a history, because the quality of real estate projects can only be proved with time. For example, sloppy construction work can translate into disputes and bad reputation years after the project is completed. The fact that the company operates profitably since 10 years makes me believe that they know what they are doing.

As for the company's financials, I only read the opinions of other analysts (see sources at the end of this post). They are good and more importantly the company has good liquidity and solvency.

Finally, the management team is made of seasoned industry professionals and managers. In particular, Mr. Yong Zhang, Xinyuan's CEO, has strong relationships with government, which is critical to overcome bureaucratic and regulatory obstacles in China.

Last but not least, Xinyuan is the first Chinese company targeting tier 2 cities that is listed in US markets. As a result, it will capture the attention - and the capital - of many investors who are thinking about the Chinese real estate market.

Sources:

• China Housing & Land Captures The Hot Chinese Real Estate Market (Seeking Alpha)
• China's Real Estate Market Comes Off Boil (Forbes)
• Xinyuan Real Estate IPO Analysis: Poised for a Strong 2008 (Seeking Alpha)
• China Real Estate IPO: Xinyuan Real Estate Co. (Seeking Alpha)
• Xinyuan's prospectus filed with SEC
• Educated guess

Financial analysis is the analysis of company and market financials as we usually refer to it, which relies essentially on existing financial information such as annual reports, and the analysis of financial ratios and their comparison with competitors and sector benchmarks.

I applied financial analysis (albeit not rigorously) to stock market investing but was disappointed with the result. Rational investors firmly believe that stock prices closely reflect the (future) financial condition of the company. Unfortunately, this is not true. This assumption falls particularly short for analyzing short term stock price fluctuations.

This is where technical analysis comes into play. By contrast with financial analysis, technical analysis tries to uncover patterns in stock prices without assuming that investor behave rationally and that all relevant information is available (i.e. "perfect market" assumption). In essence, technical analysis tends more toward psychology than finance. This makes sense because most investors do not behave rationally. The effect of news, good or bad, and more importantly herd behavior such as the bandwagon effect can move the stock prices very far (above or under) from the values resulting from financial analysis. Technical analysis tries to anticipate the irrational behavior of investors when they are exposed to news, market "feeling", or any other perception that is not grounded in finance.

We can picture the long-term stock price as following the financial analysis curve and the short-term stock prices following the technical analysis along the financial analysis curve. The questions that remain are what do long-term and short-term mean, and which analysis technique weighs more according to the stock and the market. In immature markets such as China, and emotional times such as now, we might argue that technical analysis makes more sense than financial analysis.

In other words: stop focusing on numbers only, apply some behavioral psychology!

Another great example of irrational behavior of investors. They have no clue about stock markets dynamic. And media, relaying the general feeling, only make it worse. Stock market investment works under the assumption that the market is close to perfect, i.e. information is fully available, everyone gets the information at the same time, and everyone can assess the impact of this information on the value of the companies.

Pan, the Greek god whom the word panic comes from

My modest experience with stock markets tells me that stock markets are quite imperfect. The stock markets (NYSE, NASDAQ, ...) took a beating in the last days. Some fuzzy concerns about the credit market threw the whole market into turmoil. Why? Let me explain what I think. And it has very little to do with finance. A few key so-called experts warn about potential problems. These news are relayed and amplified by hundreds of so-called experts and media, giving the impression that disaster is imminent. Most investors base their behavior on news such as these. They don't do their due diligence of digging the source of the news, examining which stocks of their portfolio might be impacted (most news are industry or country-specific), and don't even bother reading annual reports of companies they invest in to check key ratios and strategy. In other words, they fly blind.

In essence, the news about a concern becomes the cause of the meltdown. Then the "experts" are very satisfied to have been able to "forecast" the dive [ironic].
I believe that investing is better served by understanding the psychology behind herd behavior of dumb investors than by any financial analysis.